Last year, on the 19th October, we wrote a daily entitled 30 years ago today, stating that 30 years earlier we had Black Monday. Whilst re-reading that daily I found the last paragraph particularly interesting. We wrote /-
So, are we going to see a repeat anytime soon? (of Black Monday) US equities have been on a multi-year bull run, money has been cheap, there are asset bubbles globally, North Korea, Brexit, Italian Banks, Greek debt, the rise in populism, consumer debt, the leader of the free world, US & Trump relationships with not only its enemies but also its friends, trade wars/protectionism, the VIX at historical lows, possibly a new Fed Chair, the unwinding of QE, China’s ‘New era of global power’, climate change, job-killing automation, inflation killing Amazon, and as mentioned, the depth of underlying liquidity. There are enough sparks; it only takes one to catch!
So, it’s interesting to look at each of the points made.
US equities have been on a multi-year bull run. Yes, there has been a correction in recent weeks, however, they still remain amazingly resilient (the Dow has bounced nearly 700 points since last Thursday). Money has been cheap; and remains so, see the Bloomberg article ‘A $1 Trillion Powder Keg’ for a very interesting read on cheap money. North Korea; ok, Trump’s NBF (new best friend), however, how long it will last is anyone’s guess. Brexit; more chance of a hard Brexit than ever before. Italian Banks and Greek Debt; and you can now add the new Italian populist government to that particular worry. Consumer debt; a research report last year found the average person in the UK owes £8,000 – on top of any mortgage debt!
Then we get on to; US & Trump relationships with not only its enemies but also its friends, trade wars/protectionism. We have written many times of Trump's relationships not only with the rest of the world but also his own countrymen. The latest low-light being calling the Fed’s monetary policy crazy, going loco and out of control. That covers the Fed’s Powell then. The unwinding of QE; you can add the massive increase in federal debt to that one.
Lastly, we have China’s ‘New era of global power’; both economically with its Belt and Road Initiative and militarily with its South China Sea policy. Climate change; see the latest UN report stating we have 12 years to limit climate change catastrophe. Job-killing automation, & inflation killing Amazon; I can vouch for the latter with my credit card bill every month, all bought and delivered from the comfort of my work/home. And lastly, and the one that probably gathers the least attention, the depth of underlying liquidity; I believe this is something to really keep an eye on. Investment banks are not ‘one stop shops’ anymore where they will price any and all assets, which of course affects liquidity. When you hear respected market veterans talk about worries for the world’s most liquid assets (Oil, government bonds and the major FX pairs) then I think this is something we should (and here at SSC we will) keep a very close eye on.
As the last line says ‘There are enough sparks; it only takes one to catch’. If and when it does happen, (which personally I think it will) hold on to your hats because it will be an interesting ride, to say the least. My advice, be in assets where those you lent to can afford to pay you back. Now, where have I heard that before?